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Costly ISA inheritance loophole to be closed

A costly ISA loophole which has prevented spouses from inheriting the full amount of their deceased partner’s individual savings accounts (ISA) tax-free is set to be closed by the government.

Since 2015, married couples and civil partners have been able to inherit their partner’s Isas upon their death. But a gap in the rules meant that none of the growth in assets built up between the partner’s death and the point that the estate was finalised – a process that can take years – could be inherited free of tax.

For someone with a £1m portfolio in a stocks and shares ISA growing at 5 per cent per year, that growth could be worth about £160,000 over three years, according to Hargreaves Lansdown. It would not be possible to put this sum back into an ISA wrapper after being inherited, meaning the spouse could incur a tax liability covering the whole three-year period.

From April 2018, following an amendment to the ISA rules this month, a deceased partner’s ISA will remain sheltered from tax and will be passed on in its entirety to a spouse or civil partner tax-free following the administration of the estate, potentially saving thousands of pounds that could otherwise have been lost.

Under current rules, partners can inherit Isas, but rather than receiving the cash or investments inside them, they receive an extra ISA allowance equivalent to that amount. This is known as an additional permitted subscription allowance.

From next year, when an investor dies the ISA will be reclassified as a “continuing account of deceased investor” or a “continuing ISA”. No money can be paid into it from this point, but it will continue to benefit from the tax advantages of an ISA, so growth inside the wrapper will remain tax free. This status lasts until either the administration of the estate is complete, the ISA is closed, or three years have passed since death – whichever is soonest. The surviving partner will also be able to put the entire amount back into their own ISA.

“Committed savers and investors have been able to build up sizeable ISA portfolios – sometimes up to £1m or more,” said Sarah Coles, personal finance analyst at Hargreaves Lansdown. “The changes in April will cure these headaches, and iron out what has been a clunky and potentially expensive wrinkle in the rules.”

Source: Kate Beioley, The Financial Times

A Few of the more Bizarre Vat regulations!!

Value-added tax (VAT) is now over 40 years old. VAT expert Colin Corder takes a look at some of the more bizarre rules surrounding VAT and asks if VAT legislation is in need of an overhaul.

VAT was originally touted as the “simple tax” but it has become one of the most complex and illogical.

Legislation and the courts have often struggled to keep up with a changing world and today this middle-aged tax is full of anomalies and inconsistencies.

When VAT was introduced, certain goods and services were considered so essential that it was decided they should be subject to no tax. This was done in two ways: zero-rating and exemption.

In the eyes of UK law, biscuits and cakes are necessities and are zero-rated. However, chocolate-covered biscuits are regarded as a luxury, which means the full rate of VAT is payable.

The great Jaffa Cake debate

For reasons that are not entirely clear or logical, no distinction is made between chocolate-covered cake and cake without a chocolate coating.

All this might have passed us by as a quaint aspect of British legal thinking if McVities, the makers of Jaffa Cakes, had not gone to court arguing that their product was a cake. To prove its case, McVities baked a special 12-inch Jaffa Cake that persuaded the court of its cake-like properties. As a result, no VAT is charged on Jaffa Cakes or other, more traditional chocolate-covered cakes.

gingerbread-man-220181_640An equally eccentric VAT rule applies to gingerbread men.

No VAT is charged if the figure has two chocolate spots for its eyes, but any chocolate-based additions, such as buttons or a belt, mean VAT is payable. So it’s cheaper to buy no-chocolate gingerbread men.

Are you eating in or taking away?

Ever been in a cafe ordering a sandwich and wondered why the cashier is so keen to know whether you’re eating in or taking away?

This is because a takeaway sandwich is zero-rated for VAT, but if you intend to eat it at the premises it is standard-rated. Asking about your intentions helps the retailer calculate the proportion of zero- to standard-rate sales. Some cafes do charge a higher amount to eat in, but most charge the same price and just lose some margin for the eat-ins.

Chancellor George Osborne seriously underestimated the public’s love of the humble pasty when he announced plans to levy the 20% standard rate of VAT on hot, freshly-baked takeaway food as part of the 2012 Budget. A well documented U-turn followed in which the proposal was amended to allow food that was hot but cooling down to continue to be zero-rated.

Hence, pasties, pies and other hot takeaway food are zero-rated unless kept warm in the shop – for example, under a hot plate or in a cabinet, in which case it is standard-rated.

When pastygate blew up in George Osborne’s face , there were some wry smiles in Stockport. Because this is the home of the Jaffa Cake, part chocolatey-orange treat, part tax conundrum.

jaffaAll 1.19bn of these funny little biscuits made every year by McVitie’s are produced in its North-West factory.

But, of course, they are not biscuits. They are cakes. They were deemed to be so 20 years ago by a judge after a long-running and costly dispute over the VAT status of these treats.

In the eyes of the taxman, a cake is a staple food and, accordingly, zero-rated for the purposes of VAT. A chocolate-covered biscuit, however, is a whole other matter – a thing of unspeakable decadence, a luxury on which the full 20pc rate of VAT is levied.

McVitie’s was determined to prove it should be free of the consumer tax. The key turning point was when its QC highlighted how cakes harden when they go stale, biscuits go soggy. A Jaffa goes hard. Case proved.

HMRC under fire for attitude to taxpayers

hmrc

MPs have lambasted HM Revenue & Customs over its customer service, raising fears that its “unacceptable” performance is having an adverse impact on the collection of tax revenues.

Meg Hillier, chair of the public accounts committee said: “It beggars belief that, having made disappointing progress on tax evasion and avoidance, the taxman also seems incapable of running a satisfactory service for people trying to pay their fair share.”

The allegation that HMRC is failing to collect taxes because of a failure to run a decent customer service is incendiary at a time when George Osborne is planning big spending cuts to plug the deficit.

Mr Osborne’s controversial plan to cut tax credits by more than £4bn – thwarted in the House of Lords last week – is even harder for the chancellor to explain if taxes that are due are not being collected.

The cross party committee said it was “unacceptable” that HMRC only answered 39 per cent of calls within five minutes in 2014-15, far short of its 80 per cent target. Continue reading

KitKat battle sees legal setback for Nestle

Confectionery giant Nestle has failed to convince European judges that it has the right to trademark the shape of its four-finger KitKat bar in the UK.

The European Court of Justice said that the company had to demonstrate the public relied on the shape alone to identify the snack. The judges concluded this was difficult to prove if goods also showed a brand name such as KitKat. Rival Cadbury has battled to prevent Nestle obtaining the trademark. Both Nestle and Cadbury said they were “pleased” with the ruling. The case will now return to the UK High Court for a final decision.

Nestle claimed that in the 80 years since the chocolate bar was introduced, the four fingers have become almost completely associated with KitKats. In June, a senior European court lawyer, the advocate-general, disagreed saying such a trademark did not comply with European law. Nestle has not sought to trademark the two-fingered bar.

Sally Britton, intellectual property lawyer at Mishcon de Reya, said that Nestle was likely to continue arguing its case, “even if, as now appears likely, the English court decides that the KitKat shape should not be registered as a trade mark”. She said Nestle had experience of trying to register difficult marks. It took more than 40 years for it to register the slogan “Have a Break” as a trade mark, finally succeeding in 2006, she added. Continue reading

Nestle faces setback in KitKat trademark battle

kk

Confectionery giant Nestle’s attempt to trademark the shape of its four-finger KitKat bar in the UK does not comply with European law, a senior European Court lawyer has said.

The opinion of the advocate-general effectively ends Nestle’s attempts to trademark the snack.

It also brings to an end the latest chapter in the internecine chocolate wars between Nestle and Cadbury.

The High Court had already rejected Nestle’s trademark application in 2013.

Advocate-general opinions are usually, although not always, followed by the European Court judges.

Had its application been successful, Nestle would have been able to prevent competitors making rival chocolate bars of the same shape and size.

But Nestle faced significant opposition to is trademark application from bitter rival Cadbury’s and its US owner, Mondelez International. Continue reading

Income tax allowances and bands

Please note it is taxable income which applies in this assessment, including earnings, pensions in payment, cash interest, fixed interest income, dividends and rent. ISA income is not included. Income tax is generally charged per band of taxable: the personal allowance at 0%, basic rate at 20%, higher rate tax at 40% and additional rate tax at 45%. The bands are below:

Those born 6 April 1938 or after

Income bands (2015/16) Income tax rate Dividend tax rate
Personal Allowance £1 – £10,600 0% 10%
Basic rate tax band (1) £10,601 – £42,385 20% 10%
Higher rate tax band (2) £42,386 – £150,000 40% 32.5%
Additional rate tax band Over £150,000 45% 37.5%
Income bands (2014/15) Income tax rate Dividend tax rate
Personal Allowance £1 – £10,000 0% 10%
Basic rate tax band (1) £10,000 – £41,865 20% 10%
Higher rate tax band (2) £41,866 – £150,000 40% 32.5%
Additional rate tax band Over £150,000 45% 37.5%

Those born before 6 April 1938

Income bands (2015/16) Income tax rate Dividend tax rate
Personal Allowance (4) £1 – £10,660 0% 10%
Basic rate tax band (1)(3) £10,661 – £42,445 20% 10%
Higher rate tax band (2) £42,446 – £150,000 40% 32.5%
Additional rate tax band Over £150,000 45% 37.5%
Income bands (2014/15) Income tax rate Dividend tax rate
Personal Allowance (4) £1 – £10,660 0% 10%
Basic rate tax band (1)(3) £10,661 – £42,525 20% 10%
Higher rate tax band (2) £42,526 – £150,000 40% 32.5%
Additional rate tax band Over £150,000 45% 37.5%

Important notes

  1. For savings income there is a 0% starting rate tax band of £5,000 above the personal allowance. However if your non-savings income is above this limit then the 0% starting rate for savings will not apply.
  2. For all ages, the personal allowance reduces where taxable income is above £100,000 – by £1 for every £2 of income above this limit, so that the personal allowance is lost once taxable income exceeds £121,200 (2015/16).
  3. For those born before 6 April 1938 the personal allowance reduces where the income is above £27,700 – by £1 for every £2 of income above this limit. This will not fall below the basic personal allowance of £10,600 (2015/16) until income exceeds £100,000 as per (2).
  4. Age related allowances only apply to those born before the 6 April 1938.

Transferable tax allowance for married couples/civil partners is £1,060 (Does not apply if one is a higher or additional rate taxpayer).

HSBC chiefs face Margaret Hodge at her most merciless

It was Stuart Gulliver’s bad luck to be summoned before the Treasury committee last week. Margaret Hodge, chair of the public accounts committee, doesn’t take kindly to being upstaged by other committees and clearly felt that she should have had first dibs at the HSBC chief executive. It was doubly bad luck for Gulliver that this could well be Hodge’s last committee as chair; if Labour have a majority at the next election, the Tories will insist on a Conservative chair. Even at her gentlest, Hodge is a ferocious interrogator; when she’s facing her swansong in front of a large audience that included the Argentine ambassador, she is merciless. Continue reading

Overtime should count in holiday pay

Overtime should count in holiday pay

Workers have won a ground-breaking case at the Employment Appeal Tribunal to include overtime in holiday pay.

This means all people working overtime could claim for additional holiday pay. Currently, only basic pay counts when calculating holiday pay.

The tribunal also ruled that workers can make backdated claims, but only for a limited period.

However, the ruling could be referred to the Court of Appeal, meaning a final decision may be years away.

“Up until now some workers who are required to do overtime have been penalised for taking the time off they are entitled to,” said Howard Beckett of the Unite union.

“This ruling not only secures justice for our members who were short changed, but means employers have got to get their house in order.”

‘Matter of urgency’

The tribunal ruled on three cases – road maintenance company Bear Scotland versus Fulton, engineering firm Amec vs Law and industrial services group Hertel vs Wood. The employers won their original claims and the tribunal has now rejected the companies’ appeals.

The ruling has widespread implications for all companies paying overtime to their staff.

The government estimates that one-sixth of the 30.8 million people in work get paid overtime. This means around five million workers could be entitled to more holiday pay.

The coalition and business groups had argued strongly that overtime should not be included in holiday pay calculations.

Employment Appeal Tribunal to include overtime in holiday pay.
Businesses are concerned about the extra money they will have to pay out

After the ruling, Business Secretary Vince Cable said he would be setting up a task force to assess the impact of the ruling.

“Government will review the judgement in detail as a matter of urgency,” he said.”To properly understand the financial exposure employers face, we have set up a task force of representatives from government and business to discuss how we can limit the impact on business.”

Financial implications

Business leaders were more forthright.

“This is a real blow to UK businesses now facing the prospect of punitive costs potentially running into billions of pounds – and not all will survive, which could mean significant job losses,” said CBI director general John Cridland.

“This judgement must be challenged. We need the UK government to step up its defence of the current UK law, and use its powers to limit any retrospective liability that firms may face.”

Case studies:

The employee – Shane Brown, Leicester

“I work 35 hours a week as a cleaner but am only contracted to 28 hours.

“Being on near enough minimum wage is bad enough, but to have to push to get one extra day to make ends meet makes life at work very stressful.

“It also makes me less likely to want to take a holiday because no matter what I say or do, I’ll be losing out. I can’t afford to only be paid for 28 hours for even one week in a month.

“It currently has a massive knock-on effect that means I have to make a choice between eating properly (and by properly, I mean one meal a day as it’s all I can realistically afford) or not eating for a couple of days that week just to be able to have some simple pleasure in life.

“Being paid holiday for overtime worked would be extremely useful. It would take a massive weight off my shoulders so if I was to take a holiday, I wouldn’t be constantly worrying about how I’m going to make ends meet while I’m off work and I would actually be able to relax.”

The employer – Lance Harris, Bristol

“I run a small business employing 27 staff with approximately 18 working regular overtime at one and a half times the normal rate.

“My employees take home far more in wages than if they worked a normal week. This practice has been place more many years, even during the recession.

“If I have to back date a holiday pay supplement, I will curtain overtime working.

“Any such curtailment will hurt everyone but small employers are under great strain from continuous changes to working conditions, contracts, never-ending training, paternity leave, Health & Safety etc.

“Much more of this and I may well bring my retirement plans forward, to the detriment of all staff!”

Given the financial implications for companies, lawyers suggested an appeal was likely.

“The potential financial implications for many employers will be significant,” said Jean Lovett, employment and incentives partner at the law firm Linklaters.

“We envisage that the tribunal’s decision will not be the last word on this issue. As significant sums are involved, we expect the decision to be appealed.”

“Due to the costs involved many employers may now look to reduce the availability of overtime, where feasible.”

The cases centre on the interpretation of the EU-wide Working Time Directive, and in particular the Working Time Regulations implemented in the UK in 1998.

The tribunal ruling suggests that UK companies have been interpreting the EU directive wrongly.